Tuesday, February 26, 2013

Defence Acquisition: Urgent Need for Structural Reforms

Brig (retd) Gurmeet Kanwal

(Visiting Fellow, VIF)

Allegations of corruption in the VVIP helicopter deal have once again
brought to the fore the fragility of India’s defence acquisition
process. Corruption appears to be endemic in defence procurement and a
structural overhaul is now necessary.

India is expected to spend approximately USD 100 billion over the
12th and 13th defence plans on military modernisation. As 70 per cent of
weapons and equipment are still imported, there is an urgent need to
further refine the defence acquisition process and insulate it from the
scourge of corruption. The Defence Procurement Procedure (DPP) being
followed now was introduced in 2005. Since then it has been revised and
modified several times based on the experience gained in its
implementation. The current Defence Production Policy (DPrP) was
unveiled in 2011. Its objectives are to: achieve self-reliance in the
design, development and production of, weapons systems and equipment
required for defence in an early time frame; create conditions conducive
for the private sector to play an active role in this endeavour;
enhance the potential of small and medium enterprises (SMEs) in
indigenisation; and, broaden the defence research and development base
of the country. While the objectives are laudable, the achievement of
self-reliance remains in the realm of wishful thinking as most weapons
and equipment continue to be imported, the defence PSUs have a
stranglehold over contracts that are awarded to Indian companies and
defence research and development is the monopoly of the DRDO.

Defence Research and Development

The Defence Research and Development Organisation (DRDO) has been
conducting research at all levels of technology development – from the
strategic to the mundane. It should actually concentrate its effort only
in developing strategic technologies that no country will provide to
India. The report of the P Rama Rao committee had reportedly asked the
DRDO to identify eight to 10 critical areas which best suit its existing
human resources, technical capability and established capacity to take
up new projects. Since its inception in 1958, the DRDO has achieved some
spectacular successes but also has many failures to its name. The
successes include the Integrated Guided Missile Development Programme
that produced the Prithvi and Agni series of ballistic missiles and,
subsequently the BrahMos supersonic cruise missile in a collaborative
venture with the Russians.

Among the failures are the main battle tank Arjun that took
inordinately long to meet critical General Staff requirements of the
Indian Army despite huge cost overruns. The LCA (light combat aircraft)
still appears to be many years away from operational induction into the
Indian Air Force. However, to DRDO’s credit, for many decades it worked
under extremely restrictive technology denial regimes and with a rather
low indigenous technology base. The time has come for the MoD to
outsource defence R&D in non-critical areas to the private sector so
as to encourage the development of indigenous technologies. In fact,
funds should be allotted to the three Services for research aimed at
product improvement during the life cycle of weapons systems and
equipment.

Defence Procurement and Production Policies

The policy of self-reliance in defence production has not yielded the
desired results. For several decades, the primary supplier of weapons
systems was the Soviet Union and, later, Russia. If some MiG-21 aircraft
and other weapons systems like tanks were produced in India, these were
manufactured under license and no technology was ever transferred to
India. The result was that even though India spent large sums of money
on defence imports, India’s defence technology base remained very low.

The defence procurement and production policies (DPP and DPrP)
continue to pay lip service to public-private partnerships and have so
far failed to encourage India’s private sector to enter into defence
production in a substantive manner – either on its own or through joint
ventures (JVs) with multi-national corporations. The large-scale
procurement of weapons and equipment from defence MNCs has been linked
with 30 to 50 per cent “offsets”; that is, the company winning the order
must procure 30 to 50 per cent components used in the system from
within India. This will bring in much needed investment and will
gradually result in the infusion of technology. However, the MNCs do not
find the present level of 26 per cent FDI exciting enough. There is no
credible reason why overseas equity investment cannot be raised to 49
per cent immediately for a JV to be really meaningful for a foreign
investor.

As a growing economic powerhouse that also enjoys considerable
buyer’s clout in the defence market, India should no longer be satisfied
with a buyer-seller, patron-client relationship in its defence
procurement planning. In all major acquisitions in future, India should
insist on joint development, joint testing and trials, joint production,
joint marketing and joint product improvement over the life cycle of
the equipment. The US and other countries with advanced technologies
will surely ask what India can bring to the table to demand
participation as a co-equal partner. Besides capital and a production
capacity that is becoming increasingly more sophisticated, India has its
huge software pool to offer. Today software already comprises over 50
per cent of the total cost of a modern defence system. In the years
ahead, this is expected to go up to almost 70 per cent as software costs
increase and hardware production costs decline due to improvements in
manufacturing processes.

Transparency in Decision Making

While the need for confidentiality in defence matters is
understandable, defence acquisition decision making must be made far
more transparent than it is at present, so that the temptation for
supplier companies to bank on corrupt practices can me minimised. For
example, tenders should be opened in front of the representatives of the
companies that have bid for the contract. Before a contract is awarded,
the file should be reviewed by the Chief Vigilance Commissioner (CVC).
If the CVC has reservations about such scrutiny, either his charter
should be amended or an eminent persons group should be appointed to vet
large purchases. Surely, many such persons with unimpeachable integrity
can be found in India.

In the past, the selective tweaking of the technical requirements
during the procurement process has led to one company being favoured
over another. All technical requirements must be frozen when a Request
for Proposals (RfP) is issued by the MoD. It may seem heretical, but the
conclusions contained in the reports of user trials must be made
public. This step will not only amount to a huge leap forward in
transparency, but also insulate the trials teams of the three Services
from being unduly influenced to stage-manage trials in favour of any of
the contending parties.

The frequent blacklisting of defence companies is having a
deleterious effect on India’s military modernisation. Perhaps monetary
penalties can be built into the contracts instead. The MoD must
immediately undertake a structural overhaul of the defence procurement
and production process. The aim should be to streamline it so that the
armed forces get high quality weapons systems and equipment at
competitive costs, preferably from indigenous suppliers. Soldiers must
not be called upon to fight the nation’s enemies with inferior rifles
made by the lowest bidder.